With respect to real estate investments, the Internal Revenue Code requires specific language in purchase and sale agreements that justifies an investor`s intention to conduct an exchange. This wording indicates that an investor intends to sell his investment property and acquire a new one for investment purposes. For such an exchange to take place, the treaty must express its intention. This is necessary for the exchange to be eligible for the IRS. This choice of words not only justifies the investor`s intent, but also allows companies such as Exchange Resource to connect to purchase and sale agreements. Buyer acknowledges that Seller intends to conduct a tax-deferred exchange in accordance with Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations, and that Seller`s rights, title and interest (but no obligation) hereunder [insert name of purchase and sale agreement or purchase agreement or escrow instructions] are attributed to the Exeter 1031 Exchange Services; LLC, as Seller`s qualified agent, for the purpose of closing Seller`s 1031 Exchange transaction. Language of purchase agreement: Buyer hereby acknowledges that it intends the Seller to structure its sale as a tax-deferred exchange in accordance with § 1031 IRC. The Seller undertakes not to delay the completion of the transaction in question or incur any additional costs for the Buyer. Seller`s rights under the Purchase and Sale Agreement may be assigned to Legal 1031 Exchange Services, Inc., a qualified intermediary for IRC § 1031 Tax Deferred Exchanges. The Buyer undertakes to cooperate with the Seller and the qualified intermediary to complete the exchange. The specific wording of the contract in relation to this intention allows a company to perform all the necessary tasks to complete the exchange.

In addition, the language informs the other party in advance that the contract must be awarded to an intermediary. For an exchange under Article 1031, it is imperative that the contracts of purchase and sale be transferable to both parties. In order to organize a regular barter transaction with a direct deed, the qualified intermediary must be placed in a contract as the buyer of the new property and seller of the abandoned property. The taxpayer must review its agreements to ensure that it is not prohibited from transferring its buy/ask positions to a qualified intermediary. While there is no legal requirement that a contract or purchase and sale contract contain language that indicates that one of the parties is participating in an IRC §1031 Tax Deferred Exchange, there are several reasons to consider including language. The following are examples of a language that can be added to a purchase agreement. Although many exchangers typically include a language in their purchase and sale agreement to justify their intention to make an exchange, this is not required under the Internal Revenue Code. Many exchangers and real estate agents add exchange language to the contract for several reasons: this seemingly harmless verdict has opened a Pandora`s box of possibilities, not to mention confusion.

The time limit for entering into the transaction with its buyer in the Starker case was five years. In 1986, shortly after the decision was announced, Congress opted for a legislative solution. It agreed that Article 1031 did not require that the exchange of goods take place at the same time, but decided to limit the indefinite duration in order to complete the negotiation of one for the other to 180 days. Essentially, this limited period of time still allowed the two transactions to be close enough in time to be considered interconnected. But anything that comes from a longer period of time has simply broken the link between sale and purchase in unrelated transactions (for tax purposes). But practical problems abound. One of the biggest problems was knowing what to do with the buyer`s funds during the transition period between sale and purchase. Section 1031 still required an effective exchange between the taxpayer and the buyer. If the seller took the money and used it within 180 days, it wasn`t enough. By the time the taxpayer received the funds, the business became a taxable sale, regardless of whether new properties were acquired on time or not.

It was not comparable to the old rules where you could postpone the sale of a personal apartment if you bought a new one within two years. One solution was to allow the buyer to keep the funds with the contractual obligation to use them to buy the new property as soon as the seller was ready to do so. There are so many obvious risks involved in this that there is no need to explain it. `No profit or loss shall be recognised where assets held for productive purposes in the course of a commercial or commercial activity or for investment purposes are exchanged exclusively for assets of a similar nature held either for productive purposes in an undertaking or undertaking or for investment purposes.` “Buyer is aware and acknowledges that Seller intends to proceed with a deferred tax exchange pursuant to Section 1031 of the IRC. Seller requires Buyer to cooperate in such exchange and undertakes to indemnify Buyer against all claims, costs, liabilities or delays arising from such exchange. Buyer agrees to an assignment of this Agreement by Seller. Seller agrees to cooperate with Buyer and Exeter Asset Services Corporation at no additional cost or liability to Seller in performing the documents and deeds necessary to complete Buyer`s reverse 1031 exchange transaction, including any assignment, confirmation, notice and instruction to transfer ownership to the new limited liability company. Buyer agrees to cooperate with Seller and Exeter 1031 Exchange Services, LLC at no additional cost or liability to Buyer by performing the documents necessary to complete Seller`s 1031 Exchange transaction. The main function of the IQ was to put itself in the buyer`s shoes as the party with whom the taxpayer could make an exchange. Through a series of steps set out in the settlement, the taxpayer sold for tax reasons to IQ (which caused the buyer to own property) and the IQ acquired replacement property from the seller and transferred it to the taxpayer. Therefore, it was assumed that an exchange between the taxpayer and Quality ASSURANCE had taken place. The buyer was therefore not involved in the seller`s exchange transaction and did not need to cooperate. The regulation also provides for several options regarding holding the funds during the transaction, including allowing the IQ to hold them.

This is what is usually done today in an exchange. “Either party may assign its rights (but not obligations) to a qualified person acting to facilitate an exchange under section 1031 and the Regulations. That person must not be the taxable person or a disqualified person. Paragraph 1.1031(k)-1(g)(4)(iii) requires an intermediary, in order to be a qualified intermediary, to enter into a written “barter agreement” with the taxpayer and, as required by the exchange agreement, acquire the taxpayer`s abandoned property, transfer the abandoned property, acquire the replacement property and transfer the replacement property to the taxpayer. Intermediary as defined in Article 1031 of the Treasury Regulations of the IRC Code. This exchange will be closed without charge, liability or delay for the non-exchange part. Shortly before closing, it is still possible to convert an otherwise taxable sale into a section 1031 exchange. If the taxpayer wishes to set up a stock exchange immediately before closing, he must immediately contact a qualified intermediary to prepare the necessary exchange documents.

This preparation usually includes written notice of the assignment of the purchase and sale contracts and the transmission of the exchange documents to the relevant companies (usually the conclusion of the closing agent) before the sale of the abandoned property is finalized. Real estate agents associated with new and abandoned properties are responsible for including the wording of section 1031 in purchase agreements. If the language is not included in the original contracts, the assigned agent can add the language as soon as it is included in the escrow service. As another option, all parties involved can sign an IRS form instead of including the language directly in the contracts. What language should be added to the contract in a 1031 exchange? The following wording is satisfactory to prove the exchanger`s intention to make a tax-deferred exchange and exempts the other parties from the costs or liabilities resulting from the exchange: creative lawyers found an effective solution at that time. Keep the exchange relationship between the taxpayer and the buyer disclosed, but place the buyer`s purchase price in an escrow account with a third party to keep them out of the taxpayer`s receipt. This also had the advantage of keeping it out of the buyer`s possession or control. A name for this procedure quickly followed and it was affectionately called The Strong Trust! In summary, given that the rules under Section 1031 of the IRC have evolved since its inception, it was very important at some point to have a clause in the purchase agreement that requires the buyer to “participate” in the seller`s exchange transaction. One of the most significant changes to the need for buyer participation was at the heart of the 1991 Treasury Regulations by replacing a third party, Qualified Person A, who was supposed to facilitate an exchange under section 1031 and the Regulations. That person must not be the taxable person or a disqualified person. Paragraph 1.1031(k)-1(g)(4)(iii) requires an intermediary, in order to be a qualified intermediary, to enter into a written “barter agreement” with the taxpayer and, as required by the exchange agreement, acquire the taxpayer`s abandoned property, transfer the abandoned property, acquire the replacement property and transfer the replacement property to the taxpayer […].